Gary Beckerspeaks very clearly on the controversy over the MFI at U of Chicago. As Becker puts it, Friedman was (a) an outstanding teacher, (b) great scholar and leading economic scientists of the 20th century, and (c) a man of great intellectual honesty.

Because it creates institutional uncertainty, predation (the violation of property rights) is one of the main sources of stagnation and poor economic performance. Public predation in all its forms (especially tax and regulation) has been a major theme in James Buchanan’s work. In Why Perestroika Failed? Peter Boettke studied the failure of the early transition period in Soviet Russia showing how promises made and promises broken undermined the reform process and fostered public predation.

There is plenty of state predation going on around us in one form or another. States regularly renege on their promises and predate on people. It happens in the developing world but also in countries that once were among the richest on earth, such as Argentina.

The Argentine Congress has to ratify a bill that was signed by President Kirchner to nationalize private pension funds. This would transfer into the government’s coffers assets representing around US$30b of private savings accumulated over 14 years by individuals.

Allowing people to opt out of the public pension system was a failed experiment explained some official, and it is now time to rescue “from uncertainty… future pensioners and those who are currently in the (private) system.” (See here and here.) Not everyone agrees, especially those who saved for 14 years. Argentina witnessed a massive rally in Buenos Aires against the plan. Some signs read “No Plundering” or “Freedom, Freedom” (see here).

State predation creates a lot of regime uncertainty. It is not the first time that Argentina completely reverses its policy reform process. It sends the signal that because the fiscal situation of the government is unsustainable any asset can be seized by the government. It is unlikely that this latest move will help Argentina regain its past glory.

Via the Mises blog comes the news of the death of Larry Sechrest at age 62 of heart failure. Larry was a friend and colleague to many of us. Larry taught at Sul Ross State in Texas. He was a long-time member of the SDAE and frequently wrote for various Austrian and libertarian outlets. His book on free banking remains a terrific contribution to that literature. Although I did not know Larry well, my interactions with him were always enjoyable and he was one of those people who always had a smile on his face. Jeff Tucker's blog post linked above has many more details on Larry's life. Our condolences to his family and friends.

By progressively abandoning the ideas of free enterprise and free markets over the course of the last hundred years, the United States has eventually given the Europeans what they had been hoping to get for a long time: the admission from the Americans themselves that capitalism cannot work (on its own).

This is perhaps the most worrisome development of the current financial crisis. Europeans such as Ivan Pongracic and I have a different (emotional) understanding of the situation than most Americans around us who have never really lived in a world where the state not only regulates and taxes but also owns (some of) the means of production and can impose a diktat on people’s lives.

In this regard, what is happening in Europe is very concerning. Even right-wingers such as Angela Merkel and Nicolas Sarkozy (although one shouldn't be surprised) have awakened in the last few weeks as crusaders for a new type of capitalism: one that has a more human face, one that does not suffer from crisis, one that is more controlled. Unless the US reacts to this development (and it is hard to see how this would be the case), there will be no one left on this planet to oppose the establishment of a new financial order based on wrong and corrupt ideas about capitalism. The tsunami wave of the new financial order à la Sarkozy will be so high that will cover the entire world.

Richard Ebeling explains this very well in a post today (The French have a Plan: Introduce more Socialism, but Call it Capitalism). Ebeling gets it. He is among the few Americans whom I know who deeply understand the long-term impact of current American policies on world affairs. Europeans are now rejoicing, there is a climate of fear, capitalism needs to be redefined, and there are plenty of candidates to do the job. The idea of the EU as a free trade zone died in 1992 but was really buried in 2008. The EU (meaning mostly France, Germany, and the UK) now wants to export its ideas to the rest of the planet by setting up the new international institutions that will oversee the world economy and its banks. Monsieur Colbert is not dead, he is still alive and well. Let's hope Adam Smith now lives in Asia.

Whenever Richard Ebeling speaks I listen. He is a great teacher of economics (look at the generation of students he inspired at U of Dallas and then at Hillsdale) and he has a great passion for economic thought, especially the Austrian school, but not exclusively the Austrian school. Richard knows what he talks about. So when he chides me for slipping or being too loose in my statements I take notice. I might not agree I have committed the sin in question, but I check my behavior because if Richard thinks I have, then there is a strong chance I have even if I didn't intend to slip in my methodological commitments or err in the logic of my thought.

Peter:

What these debates about whether we are in a credit crunch or not;
whether we are faced with a coming serious inflation or instead
deflation; whether this wil be a "normal" recession or a coming real
depression, etc., etc., -- what this should remind all of us of is
Hayek's points about the pretense of knowledge, or what Wilhelm Roepke
called the hubris of the intellectuals.

In fact, neither Austrian Economists nor our Neoclassical and
Chicago and Rational Expectations "colleagues" know what is happening
in the economy -- nor exactly how and why it hit right now or where the
present "crisis" is taking us.

The "deadly sin" of hubris clearly has been greater with our
economist colleagues. So using all available information (i.e.,
statistical patterns of past events) and inserting it in the "correct"
model of how the macroeconomic "really" works . . .

Did Robert Lucus or Thomas Sargent know this was going to happen,
when and why? Hmmmm. Or did I miss that op-ed piece of theirs in the
WSJ? (Oh, they kept it as private, secret information so they could
make a "killing" in the market -- now I know who the evil
"short-sellers" have been.)

Bu more seriously Austrians have long insisted that the laws of
economics are essentially logical relationships, not empirical ones;
that economics can "predict" but only in qualitative terms, not
quantitative ones; that economics can only make "pattern" predictions.

This economic crisis may I suggest, again reinforces the reality of the Austrian approach to social phenomena.

Austrians (true to their theory of the logic of the interconnections
between credit expansion, market rates of interest, the term structure
of investment, and relative price and allocation effects caused by the
non-neutality of money) have often warned of the inflationary and
destabilizing consequences from Fed policy over te last decade.

But no Austrian could (or did) claim to know when the cycle would
turn, or what would set it off, and how the downturn would or could
play itsef out, i.e., in what in historical retrospect we will see from
the vantage point of some future moment as the actual patterns and also
unique time-sequence of the "micro" steps by which this will play out.

We could not and cannot know these things. As Karl Popper pointed
out in "The Poverty of Histoicism," knowledge of the future is
logically impossible. If we live in a world in which knowledge changes,
he said, then it is impossible to know tomorrow's knowledge today.
Otherwise, it would be today's knowlodge and not a knowledge of the
future, the details of which can only be known when the future comes.

We know how the Great Depression of the 1930s played out because it
is now history. We know, for example, that FDR ran on a "conservative"
platform of balancing the budget, cutting taxes, maintaining the gold
standard, limiting Federal intrusiveness in state-level affairs, etc.

And we know that he did the exact opposite of these things when actually in office.

But instead of reading histories of the Great Depression, suppose we
went into the archives of the newspapers of the time -- the "Wall
Street Journal," the "New York Times" -- and, say, from 1929 to 1935
read the stories, day-by-day, the analysis and the commentaries and
interpretations of what was happening and where it was leading.

I would suggest that virtually no one knew where the process was
leading. Because it depended upon the "complex phenomena" of individual
decisions, political policy choices, ideological influences, and
everyday actions based on the expectations held at each moment in time.

And these intersecting actions and events generated the unique path-dependent process that we call the history of that time.

All of our analysis, expectations and predictions should be
implicitly framed with the inescapable humility of what our limited
minds can know about the workings of our world.

Indeed, this is the reason we Austrians are always suspecious of
political solutions to our social and economic problems. The working
through the problem -- including an economy-wide economic crisis --
requires more knowledge about the present and the future than any one
mind or group of minds can master or ever possess.

So, are we suffering from "tight" or "easy" credit conditions? Has
the stock market and housing market "bottomed out"? Will globalization
be part of the solution to the problem, or will governments impose
forms of trade restrictions to shore up domestic output and employment
levels against foreign compeition? Will the next president actually be
more concerned with "spreading the wealth" or letting the market adjust
so the "pie" can keep growing (or growing faster than wrong-headed
policy would allow)?

We will know all the answers -- when some future economic historian
(maybe even an "Austrian") writes the history of our times, and tries
to tell those future readers how it all happened and why.

Our good friends at the Institute for Humane Studies have asked me to pass along some info on their Humane Studies Fellowships. Pete B. and I certainly benefited from IHS fellowships and programs in our grad school days, and I know that Pete L and Chris were involved with IHS as grad students as well. Fred too, I believe. If this describes you, you should definitely apply for these as they are not only good money but get you involved in the IHS network.

The Institute for Humane Studies is
currently soliciting applications for the 2009-10 Humane Studies
Fellowships. IHS hopes to exceed last year's award totals of $600,000 to
more than 150 graduate and advanced undergraduate students from around the
world. The awards support research into the principles, practices, and institutions
that support a free, prosperous and responsible society. Select applicants are
invited to the annual Humane Studies Research Colloquium and other advanced
colloquia throughout the year. Fellows also join a growing network of over
10,000 IHS academics who are committed to the ideas of liberty and intellectual
freedom. For more information, visit www.TheIHS.org/HSF or contact
Mr. Jasmin Guenette, Academic Programs Director, at jguenette@ihs.gmu.edu. The
deadline to apply is December 31, 2008.

Over at Marginal Revolution Alexand Tyler are engaged in an interesting discussion on the theory and empirics of the credit crunch. I find Alex's arguments to be the more persuasive. How about you?

Also, Anna Schwartz continues to provide important insights into this mess. She has argued that unfortunately the Fed and the Treasury have acted as if the only lesson to be learned from the Great Depression is the lack of liquidity lesson, which she argues is not the relevant lesson. She also used an interesting argument about how the attempt to recapitalize the banks is doomed to failure because we are trying to recapitalize insolvent banks, when only the solvent banks are the only institutions capable of using the funds correctly. This is similar to the arguments and data we found in relation to foreign aid --- only those countries that already had good institutions were the countries that could use foreign aid productively, countries where the institutions are bad, foreign aid just goes into a black hole. But, of course, the countries with good institutions do not require foreign aid because they are already receiving foreign direct investment. Schwartz's argument applied to the banks reinforces why the bailout and recapitalization policies we are following are counter-productive. But they no doubt make politicians feel better because they are at least doing something, even if that something is the wrong thing to do!